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Is It Time To Buy Unloved BP plc And Royal Dutch Shell Plc?

As a collective, the human race is hardly known for its great decision-making. For evidence, consider that we’ve spent $2.8bn watching the Transformers movies at the cinema.

Or that Arsenal fans spend up to £1,470 a year to take part in a dramedy, when a Netflix subscription costs £6 a month with a more diverse range of genres, some of which don’t induce sobbing.

The stock market isn’t much different. Unconvincing businesses raised millions in capital during the dotcom bubble and investors subsequently took a pasting. Inversely, investors frequently sell stakes in businesses irrespective of how sound the long-term prospects are.

Two companies I’ll be analysing from this viewpoint are Shell (LSE: RDSB) (NYSE: RDS-B.US) and BP  (LSE: BP) (NYSE: BP.US). Both trade on a price-to-earnings ratio of around 10, which is considered cheap, going on bargain territory. If you’re a canny value investor, then there’s nothing better than finding a business that is unloved by the wider market, but with serious potential.

Shell

royal dutch shellWe’ll start with Royal Dutch Shell, the share price of which has largely lagged the benchmark FTSE 100 index in the last year. Shell has been hit by numerous setbacks, including a court ruling that dashed the firm’s hopes of drilling in the Arctic waters off Alaska this summer.

Oil companies are known for their steady dividends, but Shell’s profitability has been on the slide, and there is concern that shareholder payouts may come under pressure. In 2013 profits were down to £11.8bn compared with over £15bn a year earlier.

That’s a lot of bad news.

But the dividend is more than supported by operating cash flow. Net cash of $40bn is plenty enough to cover capital expenditure and the $5.5bn dividend. Meanwhile the chief executive, Ben Van Beurden, has committed to improving cash flow performance.

Shell is targeting $30bn in asset disposals this year, which should boost shareholder returns.

BP

BPIt’s hard to think of BP and not picture the images from the Deepwater Horizon oil spill. No company, in my lifetime at least, has seen such a deluge of bad press. Indeed, it’s hung over the share price, which remains depressed.

BP was forced to set aside an extra $200m relating to the disaster earlier this year, and to blunt any future headwinds BP expects to generate $10bn in divestments by the end of 2015.

But BP’s business is unsinkable. The worst is over, and even when it was darkest, the dividend wasn’t scrapped. In 2010 the dividend was cut from 36p to around 9p, but since then the dividend has gained 170%.

Investing in BP isn’t without risk, but if the opposite was true you’d pay significantly more than the 477p the shares currently trade for, and while you wait for the share price to recover you can collect an income of 5%. That sounds like a decent value investment to me.

Investing for success 

Indeed, value investing is also a skill, and like any other skill it can be improved. To succeed, you need to separate yourself from the herd. Do your own research and create unique angles.

As a starting point, I'd recommend you read the Motley Fool's "Ten Steps To Making A Million In The Market". Most people won't put in the effort, but after reading our easy-to-understand report you'll end up streets ahead of everyone else.

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Mark does not own shares in any company mentioned.